Equity markets staged a roaring comeback from the COVID-induced losses of Q1, with US stocks bouncing back to record their best quarterly return since 1998. The S&P 500 index, which tracks the performance of the 500 largest US stocks, gained +20.6% in the second quarter and is now down just -3.1% for the year. Overseas equities gained +16.1% in Q2 for a year-to-date loss of -11.0% as measured by the MSCI ACWI ex-US index.
Elsewhere, bond markets continued to rally on the back of falling interest rates, as the Barclays US Aggregate Bond Index gained +2.9% on the quarter (+6.1% YTD). After starting the year at 1.9%, the 10-year US Treasury bond was yielding just 0.66% at the end of Q2. Gold prices similarly benefited from lower interest rates as an alternative store of value, with spot prices rising +9.9% on the quarter for a YTD gain of +16.7%. A balanced portfolio, comprised of 60% in global equities and 40% in fixed income, would have rallied +13.2% in the second quarter for a full-year loss of -0.6%
With the unprecedented degree of market volatility and economic uncertainty caused by the COVID-19 pandemic, our firm is proud to have a time-tested, data-driven Three Dials methodology to help our clients sift through the noise and focus on evidence over opinion. Below is a summary of where each of our primary indicators stands through the end of the second quarter, all of which remained unchanged during the month of June:
While we’ve seen a retracement from the March lows, equity markets have a long way to go towards logging new all-time highs. After recovering its long-term support level in May and rallying into the first week of June, the S&P has moved largely sideways as traders looks to ascertain the next direction of this market. As such, our Momentum Dial shows a “Neutral” reading through the end of the quarter.
The best news for the global economy is that data is starting to look “less bad”. Initial unemployment claims in the United States totaled 1.4 million in the last week of June, down significantly from the March peak of 6.9 million but still elevated from the 220 thousand claims in the last week of 2019. Consensus estimates for Q2 GDP growth remain in the range of -35%. With states reopening in fits and starts, we expect the economic data to be challenged for the near future, which leaves our Fundamental Dial in a “Negative” position.
While stock prices recovered during Q2, forward earnings expectations continued to fall. The S&P price-to-earnings ratio currently sits around 22x, well above the 10-year average of 15, pointing to a richly priced market. As such, our Valuation Dial remains in a “Negative” position.
On balance, our Three Dials composite reading takes a somewhat defensive view into the second half of the year. Our base case remains that the March lows established a near-term market bottom, though a degree of caution is warranted given the uncertainty around a post-COVID future.
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Sources:
https://www.nytimes.com/2020/07/01/business/dealbook/stocks-quarter-guidance.html
https://fred.stlouisfed.org/series/ICSA
https://www.frbatlanta.org/cqer/research/gdpnow